Tax and Budget Reform Must Be Tackled in Tandem
With the state economy struggling and tens of thousands of Louisianans moving out of state, families and businesses are hungry for tax relief. They also want an assurance that state government will use tax dollars responsibly. Tax reform that encourages growth and treats individuals and businesses fairly can spark an economic revolution in Louisiana. It can also serve as an incentive to attract and keep people in the state. Following years of short-term thinking, policymakers have an opportunity and responsibility to embrace a more comprehensive, holistic approach that will modernize Louisiana’s tax and budget policy, bringing long-needed fiscal stability.
The state’s budget has grown in tandem with revenue increases and program expansions over the last decade. Dramatic growth began in 2016 with the increase in the state sales tax and further increased with the addition of numerous tranches of federal funding for Medicaid expansion, the pandemic, and natural disasters.
A priority should be to limit the growth of state spending with an effective expenditure limit that more closely mirrors the average taxpayer’s ability to pay for state government. Over the last ten years, government spending grew 2.5 times faster than it would have under a stricter limit.
Reforming the state’s budget process without corresponding tax reform—or vice versa—makes both activities much more difficult and less fruitful. Louisiana has incredibly complicated tax and budgeting structures.
A progressive income tax system means that as income increases, the tax rate increases. Additionally, Louisiana’s system includes too many complicated exemptions, exclusions, deductions, and carve-outs for certain taxpayers that shift their burden onto everyone else. The Legislature has made strides in recent years toward lowering taxes and reducing complexity, but more work is needed.
To make matters worse, the revenues that are received are frequently locked up in various silos that limit the use of the funds. Each silo restricts money that could be used to address current priorities and balance the budget and limits legislative discretion and oversight.
Pelican has several solutions to these complicated problems, and they are found in our Comeback Agenda.
To address budget complexity, lawmakers should:
- Identify true spending priorities through comprehensive budget reform and efficiency audits;
- Increase flexibility by freeing up dedicated funding locked in silos;
- Limit the growth in spending with an improved expenditure limit;
- Set a maximum threshold for the initial appropriations of funds;
- Restructure the state and local government relationship;
- Refocus capital outlay spending to essential state government projects.
To address the state’s tax burden and reduce complexity, we must:
- Create a flat tax on personal income with the goal of eventual elimination;
- Streamline corporate taxes by eliminating exemptions, deductions, and credits, eliminate the franchise tax, and phase out the burdensome inventory tax;
- Ease sale tax administrative burdens and broaden the base of the sales tax to provide further income tax relief.
By taking these important steps, Louisiana state government leaders can more effectively carry out their duties to meet critical short-and long-term needs and demonstrate good stewardship of taxpayer dollars.